Economy & Trade, Financial Crisis, Headlines, North America

U.S.: Obama Unveils Broad Banking Industry Reforms

Eli Clifton

WASHINGTON, Jan 25 2010 (IPS) - U.S. President Barack Obama has delivered his plans for far-reaching banking and financial industry reforms, which mark a noticeable shift to the left in the administration’s domestic policy and an acknowledgement of the public anger at Wall Street for its role in the financial crisis.

The White House’s rollout of what is being billed by experts as the biggest overhaul of Wall Street since the Great Depression came in the same week that the Democrats lost their filibuster-proof majority in the Senate with the loss of Edward Kennedy’s Senate seat – a loss widely seen as a referendum on the Obama administration’s first year in office.

The new banking regulation proposals would ban banks from owning, running or investing in hedge funds or private equity groups for their own profits and would put in place policies to prevent the consolidation of the banking sector.

‘While the financial system is far stronger today than it was one year ago, it’s still operating under the same rules that led to its near collapse. These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system,” Obama said on Jan. 21.

Obama followed up on his banking and finance reforms proposals with a plan Monday that he said would “reverse the overall erosion in middle class security,” in the form of a series of proposals to help families pay for elder care, save for retirement, pay for child care and pay off student loans.

The administration’s focus over the past week to reconnect with middle-class citizens and tap into the populist anger over the Troubled Asset Relief Programme (TARP) – a 700-billion-dollar programme to purchase or insure “troubled assets” – comes after last week’s rebuke from Massachusetts voters.

That race led Obama to admit that, “I think we lost some of that sense of speaking directly to the American people about what their core values are and why we have to make sure those institutions are matching up with those values,” in an interview with ABC’s George Stephanopoulos.

The shift of focus from the White House and the emphasis on championing the middle class and reforming the banking and finance sectors comes as Democrats are pushing Obama to regain the populist momentum which carried him into office one year ago.

Robert Borosage, president of the left-wing Institute for America’s Future, told IPS, “Drawing a contrast between your direction and the policy which drove us off the cliff is the direction this administration has to move in and improve. This president, in his search for bipartisanship, has been reluctant to make the case against the conservative policies which drove us off the cliff.”

The shift in tone from the White House is not just limited to the policy proposals put forth by Obama last week and on Monday, but also by whose policies recommendations he has chosen to follow.

At the president’s side on Thursday was Paul Volcker, the former chair of the Federal Reserve, who has advocated for months for new policies that would prevent banks from running their own hedge funds, private equity groups and trading desks.

The new policy proposal – reflecting Volcker’s advocacy – is to be called the “Volcker Rule”.

On Friday, economist Joseph Stiglitz told the House Financial Services Committee that, “Market economies work to produce growth and efficiency, but only when private rewards and social returns are aligned. Unfortunately, in the financial sector, both individual and institutional incentives were misaligned.”

Stiglitz has been critical of the Obama administration’s failure to initiate more sweeping reforms of the banking and finance sector, but the White House’s latest proposals reflect policies more closely aligned with the reforms proposed by the Nobel Prize-winning economist.

Treasury Secretary Timothy Geithner, who has been accused by Democrats of being too soft on banks, supported the policy proposals even though Volcker’s policies go considerably further than the reforms Geithner had proposed.

The pick of Volcker’s reforms over Geithner’s was welcomed by those who sought a more extensive overhaul of the banking industry. However, banking industry officials were disappointed that Geithner – who is widely perceived as a banking industry insider and who previously served as president of the Federal Reserve Bank of New York – appears to be wielding less influence in forming policy.

The White House’s new proposals will require the approval of Congress and Obama was quick to point out that industry lobbyists were already “descending on Capitol Hill to try and block basic, common-sense- rules of the road.”

Obama called on financial industry leaders to work with the government on implementing reforms but warned that attempts to block reforms would be a challenge his administration would overcome.

Noticeably absent was the rhetoric of consensus building and bipartisanship that Obama has widely utilised during his first year in office.

Obama concluded, “So if these folks want a fight, it’s a fight I’m ready to have.”